The main point
Innovative industries like crypto present new challenges for policymakers and tax authorities who must adapt old frameworks to new assets – or create entirely new frameworks.
Fair and proportional special tax policies also accompanied by technically correct guidelines can benefit the crypto industry and the national economy.
Taxing crypto trades on a gross basis that introduces withholding requirements for intermediaries and ignores internationally tested best practices is considered a suboptimal approach to taxing digital asset-related activities.
A strong tax policy is the cornerstone of every economy. The history of tax arrangements around the world shows that successful tax policy centers on the right balance between efficiency and fairness – a complex formula that varies based on each country's economic and social context.
Innovative business models and industries often present new challenges for policymakers and tax authorities that encourage them to design and implement appropriate rules and guidelines. This new framework should provide sufficient clarity to users and service providers so they can operate within the law while spurring the economy through innovation. For example, digital assets offer a myriad of new uses, given their unique capacity to hold and transfer value without interacting with traditional financial intermediaries. This clearly requires a new tax approach.
This blog outlines some general principles that make for good tax policy for the crypto asset sector and highlights some best practices globally, as well as stumbling blocks to be aware of when designing crypto tax rules.
Do: Ideas for good tax policy and administration
Introduce a custom framework
Do: Introduce crypto-specific provisions to accommodate the range of new activities and transaction types that may occur in the sector.
Reason: Current tax laws and regulations often date back decades, and efforts to incorporate digital assets into this framework often fall short.
Emphasize clarity
Do: Provide detailed and technically precise instructions or rules. If crypto-specific legislation is not yet available, publish official FAQs or guidelines.
Reason: Most people are tired of taxes, and dealing with crypto transactions only adds to the complexity. Detailed rules and guidelines can be of great help in this regard.
Make it proportional
Do: Levy taxes and introduce reporting obligations for crypto that are in line with, or at least no more burdensome than the treatment given to similar industries (such as finance and technology).
Reason: To avoid disincentivizing digital asset innovation by making crypto-related tax compliance more detrimental and burdensome than other types of similar activities.
Tax fairly and efficiently
Do: Privilege tax on realized capital gains instead of transactional tax, which is often uneconomical in the digital finance industry.
Reason: Digital assets and crypto-related services are typically operated in a similar manner to the financial industry where investments and highly tradable assets are broadly exempt from VAT (value added tax) or GST (goods and services tax). Otherwise, the tax costs will make it almost unfeasible.
Promote attractive policies
Do: Offer better-than-standard tax treatment for crypto-related activities, such as lower tax rates or tax exemptions for capital gains from the disposal of digital assets.
Reason: To attract talent, innovation, economic growth and high value-added taxpayers. The last few decades have been marked by tax incentives for investment and new professionals in technology. Similar policies should be applied to crypto, the next big technology disruptor.
Method: Various relevant policy measures can be found in various parts of the world. Here are some examples:
i) There is no capital gains taxation on the sale of crypto assets, for occasional investors or traders (e.g. non-professionals). For example, this general policy is implemented in Singapore, Belgium, Malaysia, Hong Kong and Switzerland.
ii) Capital gains exemption for long term holdings. Germany and Portugal are examples where this favorable treatment was recently introduced for crypto assets held for more than 12 months.
iii) Exemption of capital gains if below the minimum or de minimis threshold. For example, this policy is implemented by the UK and Brazil.
iv) Capital gains tax only upon conversion to fiat (direct or indirect), i.e. non-tax or crypto to crypto transactions. France, Portugal and Austria are countries that have introduced this approach.
Avoid: Tax policies that stifle crypto innovation
Gross transaction leasing
Avoid taxing gross crypto trades – including the costs associated with those transactions – but tax realized capital gains.
Reason: Such an approach imposes significant (and sometimes unbearable) tax costs on trading activities. First, it can burden even occasional investors who may be taxed for losing trades – even if tax refunds for such overpayments are offered later. Second, such a tax would burden market makers who typically carry out hundreds or thousands of automated transactions per day with the aim of making lots of trades for small profits. At the end of each period, market makers will likely have tax liabilities that are much higher than the profits to cover those liabilities. In fact, market makers are important liquidity providers for the crypto economy. When they left, the market took a hit. The main immediate implications are a drain on local liquidity and volume as well as increased volatility that effectively cripples local crypto markets. The shrinking crypto economy will push players out of the market which will then lead to a decrease in total tax revenues.
This sequential negative impact has been observed in jurisdictions where this type of transactional tax was introduced. The two most prominent cases are:
Indonesia: Trading volume on local crypto exchanges decreased by around 60%, according to Coinmarketcap data, following the implementation of a transaction tax on gross transactions (0.11% VAT and 0.1% income tax to be withheld by local exchanges) in May 2022.
India: Weekly trading volume on local crypto exchanges fell from a record point of ~$800 million to a record point of $2 million following the implementation of a transaction tax on gross transactions (1% of Tax Deducted at Source or “TDS”) in July 2022 (according to Coinmarketcap ).
Instead, consider: Privilege taxation is imposed only on realized capital gains.
Relying on Tax Withholding Obligations to Enforce Compliance
Avoid imposing withholding tax obligations on intermediaries such as exchange platforms. While at first glance it may seem like an adequate tool to enforce tax compliance in the crypto space, it can easily have detrimental impacts on the industry.
Reason: Here are some things that could be detrimental:
If withholding tax obligations were imposed on trading, the measure would essentially be a transactional tax producing the effects mentioned in the point above.
If withholding tax obligations are imposed on other income streams, such as mining or staking rewards, the policy risks being unfair or unattainable. Unfair, because it can inaccurately assume the legal nature of the event (such as treating something that is not interest as interest). Unattainable, as there is often no easily identifiable intermediary, such as with DeFi products and services.
Withholding tax obligations tend to be much more difficult to execute in the crypto space than in other industries. One reason is that the actual deductions are mostly made in crypto, while subsequent collections for public revenues must be in fiat with few exceptions. This creates an additional conversion step that not only presents significant complexity as well as potential obstacles, as fiat off-ramp channels are not always available.
We recommend considering: Leveraging crypto reporting frameworks currently being adopted, such as CARF by the OECD.
Misalignment of domestic tax policy with international standards (good)
Avoid ignoring international best practices. Crypto tax policymaking is in its early stages and is expected to evolve significantly in the following years. Nevertheless, certain standards have begun to take shape throughout the world. This should not be ignored. An important example is the widely implemented exemption of cryptocurrency transactions from VAT/GST.
Reason: Deviating from an important policy like this would likely put a country at a serious disadvantage in terms of industrial development.
We recommend that you consider: Participating in international bodies that hold technical discussions to more easily improve the best practices and rules established and used around the world.
Want to learn more about cryptocurrency taxation and what Binance is doing to simplify users' tax filing experience? Please see the following resources:
How Are Cryptocurrencies Taxed?
Paying Crypto Taxes Helps You and the Entire Web3 Industry – Here's How
Introducing Binance Tax: Streamline Your Tax Reporting Tasks
How to Make a Tax Report via Binance Tax
